Stocks Are Undervalued And May Have Even Further To Rise

Stocks have seen a significant rebound since the Christmas Eve disaster. The S&P 500 has risen almost 14% and is now down about 9% from its highs. Unlike the stock market, forecasts for 2019 earnings estimates continue to drop. As of January 17, data from Dow Jones S&P Indices estimate that earnings will climb to $169.61 per share in 2019 up 8.1% from 2018 estimates of $156.89.

(Data From Dow Jones S&P Indices)

Trending Lower

Estimates for 2019 have been steadily falling since August when they peaked at $177.07, falling 4.2% since then. The trend of lower earnings growth in 2019 is something that is likely to continue for some time, but the big unknown is just how far they could fall. It is still early in the first quarter earnings season, but with 10.5% of companies in the index reporting, 73.5% have beaten estimates while 19% have missed estimates, and 7.5% met.If the trend continues, it will result in the lowest beat rate since the second quarter of 2017, and the highest missed rate since the third quarter of 2017.

Energy Is The Big Problem

A significant reason estimates in the S&P 500 are falling is due to the fall in oil prices. Factset data shows that earnings estimates for the energy sector for the first half of 2019 have fallen 30%.The second biggest reduction in earnings estimates have been the technology sector at 7.2%

It is entirely possible that throughout the next several week’s oil price continue to recover, and that would help to stabilize the earnings outlook for the sector and the broader equity market. Should oil prices stabilize or continue to rise it is likely to be positive for the equity market.

It also isn’t entirely clear how much estimates for 2020 need to come or if they do need to fall. Estimates would suggest earnings growth of nearly 14% versus 2019 estimates. A healthy growth rate, which would indicate the current PE ratio of 13.8 is less than the 2020 earnings growth rate.

Disclaimer: This article is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly, and I do not trade my account on the stocks spoken of in this column unless fully disclosed.
Additional Disclaimer:

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

Michael Kramer is the Founder of Mott Capital Management. He is also a financial writer for websites such as Investopedia, Seeking Alpha and the Monster Stock Market Commentary providing stock and ...
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Michael Kramer is the Founder of Mott Capital Management. He is also a financial writer for websites such as Investopedia, Seeking Alpha and the Monster Stock Market Commentary providing stock and market analysis. He has over 20 years of industry experience as an analyst, trader, and an investment manager. He earned his MS in Investment Management from Pace University and a Certificate in Risk Management from New York University.

His unique investment philosophy centers on seeking investment opportunities that are influenced by everyday life activities, and by observing new trends and products that are popular, or are trending towards popularity.

Additionally, Kramer runs the Mott Capital Management actively managed long-only Thematic Growth Portfolio. The strategy was developed in August of 2014. Further, Kramer is a premium author and creator of “Reading the Markets,” an exclusive offering on Seeking Alpha’s marketplace, which discusses trends and opportunities in the markets. He is also a regular writer and contributor for Investopedia.com, analyzing stocks and news that is helpful for everyday investors.

Kramer began his career in high-risk trading environments, trading both US and International equities for US Trust and Gilder, Gagnon, Howe & Co. His trading skills coupled with his comprehensive, financial analysis of public companies, have given him a unique perspective on investing, which stands out from analysts who simply look at top-line numbers. Additionally, he pays particular attention to finding new generational themes and trends in society, and devotes a significant part of his research to global macroeconomics and central bank policies that impact financial markets.